- Australian Securities Commission v Marlborough Gold Mines Ltd

Supreme Court of NSW|2023-10-11|Before: Black J

Solicitors: MinterEllison (Plaintiff) Allens (Bidder) File Number(s): 2023/276387

Nature of application and background

By Originating Process filed on 30 August 2023 the Plaintiff, Estia Health Ltd ("Estia Health") sought orders under s 411 of the Corporations Act 2001 (Cth) ("Act"), inter alia, that it convene a scheme meeting to consider a scheme of arrangement, and associated directions under s 1319 of the Act.
By way of background, Estia Health is listed on the Australian Securities Exchange ("ASX") and is a residential aged care provider which operates a portfolio of residential aged care facilities in several Australian states. On 6 August 2023, Estia Health entered into a Scheme Implementation Agreement ("SIA") with Firebird BidCo Pty Ltd ("Firebird BidCo") which it announced ASX on 7 August 2023. Under the terms of the proposed scheme, Firebird BidCo will acquire all of the issued shares in Estia Health on the Implementation Date (as defined) for $3.20, less the amount of any permitted dividend declared in accordance with the SIA. Subsequent to entry into the SIA, Estia Health paid a dividend of $0.12 per ordinary share, as permitted under the SIA, such that the scheme consideration is now $3.08 per share.
I made the orders sought by Estia Health at the conclusion of the hearing on 11 October 2023. These are my reasons for doing so. I have drawn on the helpful submissions of Mr Izzo, who appeared for Estia Health at the hearing, in this judgment.

Affidavit evidence

Estia Health reads the affidavit dated 30 August 2023 of its solicitor, Mr Anthony Sommer, in support of the application, which annexes a current company extract in respect of Estia Health.
Estia Health also reads the affidavit dated 10 October 2023 of Ms Suzy Watson, General Counsel and Chief Privacy Officer of Estia Health, in respect of the application. Ms Watson there notes that the directors of Estia Health unanimously recommend that its shareholders vote in favour of the scheme in the absence of a superior proposal and subject to the independent expert continuing to conclude that the scheme is in the best interests of Estia Health's shareholders. Ms Watson also notes that, subject to those qualifications, each director intends to vote all of his or her Estia Health shares in favour of the scheme. Ms Watson also refers to a break fee provided under cl 15.3 of the SIA, which is less than 1% of the total cash value of the proposed scheme, and to exclusivity arrangements under cl 17 of the SIA.
Ms Watson also addresses the verification process which has been adopted in respect of the information concerning Estia Health in the scheme booklet and exhibits the script for dealing with inbound calls on a shareholder information line and for a proposed outbound call campaign directed to the top 100 institutional investors in Estia Health. Ms Watson also notes that Estia Health proposes to provide notice of the second Court hearing by an announcement made on the ASX and on its website, and addresses the process which will be adopted for the dispatch of documents relating to the scheme meeting to Estia Health's shareholders. She also addresses the identity of the proposed chair and alternate chair of the scheme meeting, their interests and their consent to act as chair and alternate chair of the scheme meeting respectively.
Estia Health also reads the affidavit dated 10 October 2023 of Mr Noah Obradovic, who is a solicitor acting for Firebird BidCo in respect of the proposed scheme, which deals with the verification of bidder information contained in the scheme booklet, the process of board approval in respect of Firebird BidCo and Firebird BidCo's execution of a deed poll in respect of the scheme.
By a second affidavit dated 9 October 2023, Mr Sommer addresses communications with the Australian Securities and Investments Commission ("ASIC") in respect of the proposed scheme.
Estia Health also tendered the scheme booklet and Mr Izzo took me through that scheme booklet in the course of his submissions. Estia Health also tendered a letter dated 10 October 2023 from ASIC to Estia Health, in customary form, by which ASIC indicated that it did not propose to appear to make submissions to intervene to oppose the scheme at the first Court hearing, while reserving its position in respect of s 411(17) of the Act to the second Court hearing, consistent with its usual practice.

Applicable principles and their application

Mr Izzo rightly recognises that the principles governing an application for orders to convene a meeting of members under s 411(1) of the Act are well settled. In summary, the Court's discretion to make an order under s 411(1) is enlivened if a compromise or arrangement is proposed between a Part 5.1 body and its members (or any class of them); application for the order is made in a summary way by the body; 14 days' notice of the hearing of the application has been given to ASIC (or such lesser period as the Court or ASIC permits); and the Court is satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement and make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory booklet.
Mr Izzo submits and I accept that each of these requirements is met in the present case. The application is brought by a Part 5.1 body where Estia Health is a company registered under the Act and a Part 5.1 body for the purposes of s 411 of the Act, and the proposed change of control transaction under the scheme is an 'arrangement' within the meaning of s 411 of the Act. ASIC has had the requisite notice and an opportunity to consider the scheme and I have referred above to ASIC's letter confirming that it does not propose to appear to make submissions or intervene to oppose the proposed scheme at the first Court hearing. Estia Health has complied with the requirements of r 2.4(2) of the Supreme Court (Corporations) Rules 1999 (NSW) ("Rules"); the chair and the alternate chair nominated for the proposed scheme meeting have each confirmed the matters required by r 3.2(b) of the Rules, by evidence given on information and belief in Ms Watson's affidavit; and the proposed draft orders for the convening of the scheme meeting identify the scheme as required by r 3.3(1) of the Rules.
Estia Health has also obtained a report from an independent expert indicating that, in the expert's opinion, the scheme is fair and reasonable and in the best interests of shareholders in Estia Health, in the absence of a superior proposal, for the reasons set out in that report. In accordance with paragraph 25(d) of Practice Note SC EQ 4 (as at the date of this hearing), which corresponds to paragraph 26(d) of revised Practice Note SC EQ 4 ("Harmonised Practice Note SC Eq 4"), which became effective on 18 October 2023 and implemented Practice Note - Harmonisation in schemes of arrangement as developed by the Committee for the Harmonisation of Rules of the Council of Chief Justices of Australia and New Zealand, it is not necessary for Estia Health to file an affidavit of the independent expert verifying that report; see also Re InvoCare Ltd [2023] NSWSC 1180 ("InvoCare") at [12]. As I noted above, Ms Watson also summarises the verification procedure undertaken in respect of the "Estia Health Information" in the scheme booklet and Mr Obradovic summarises the verification procedure undertaken in respect of the "Bidder Information" in the scheme booklet, which were in customary form.
Mr Izzo notes that the scheme meeting will be held as a physical in-person meeting and the procedures for voting and participation in the scheme meetings are disclosed in section 4 of the scheme booklet and in the Notice of Scheme Meeting at Appendix 4 to the scheme booklet. Estia Health propose to make an ASX and website announcement as to details of the second hearing, listed at 4.15pm on 17 November 2023. This is a proper case for dispensing with the requirement under r 3.4 of the Rules to publish an advertisement in a newspaper, as contemplated by paragraph 25(f) of the Practice Note SC Eq 4 as at the date of the hearing (corresponding to Harmonised Practice Note SC Eq 4 at [26(f)]), where that course is more likely to draw that hearing to shareholders' attention than a newspaper advertisement: InvoCare at [22].
Mr Izzo also rightly recognises that the principles which apply to the exercise of the Court's discretion are well established, and that the Court must be satisfied that the scheme is fit for consideration by Estia Health's shareholders in the sense that it is of such a nature and cast in such terms that, if it achieves the statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed; and that members are to be properly informed as to the nature of the scheme before the scheme meeting: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504; Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 at [36] and [44], cited with apparent approval in Re CSR Ltd (2010) 183 FCR 358; [2010] FCAFC 34 at [58]; Re Villa World Ltd [2019] NSWSC 1207 at [15]-[19]; Re PropTech Group Ltd [2022] FCA 1606 at [19]; InvoCare at [16]-[17]. Mr Izzo submits and I accept that the scheme is an orthodox all-cash acquisition, and there is nothing in the terms of the scheme that would lead the Court to decline to convene the scheme meeting so as to permit its consideration by members.

Additional matters

Mr Izzo draws attention to several additional matters with respect to the scheme, consistent with the approach contemplated by Barrett J in Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at 603.
First, Mr Izzo draws attention to the question of performance risk and points out that the scheme adopts the conventional step of making the transfer of the Estia Health shares to Firebird BidCo subject to the payment of the scheme consideration, under cl 4.2(a) of the scheme of arrangement. Mr Izzo points out that, as a result, no transfer of Estia Health shares may occur unless and until the total scheme consideration to which Estia Health shareholders are entitled has been paid into a trust account for the benefit of those shareholders. He points out that further protection is provided by a deed poll at Appendix 2 to the scheme booklet that Firebird BidCo has entered into in favour of the Estia Health shareholders. He submits and I accept that these are well established means of managing performance risk: Re ELMO Software Pty Ltd [2023] NSWSC 12 ("ELMO") at [27]-[28].
Mr Izzo recognises that issues may arise where a party to the deed poll is a special purpose vehicle which does not have capacity to perform its obligations under that deed poll without financial support from a holding company, and where funding from a third party is presently conditional: Re Spark Infrastructure RE Ltd (2021) 156 ACSR 257 at [31]-[32]; Re Sydney Airport Ltd and the Trust Company (Sydney Airport) Ltd as responsible entity for Sydney Airport Trust 1 [2022] NSWSC 25; ELMO at [28]. Paragraph 28(b) of Harmonised Practice Note SC Eq 4 (which took effect after this matter was heard) now provides that: "[w]here a special purpose vehicle with minimal assets is to acquire securities of substantial value under a scheme, a risk of a scheme not completing is likely to be material to securityholders, irrespective of the fact that their securities are not transferred to that special purpose vehicle until the consideration is paid. Disclosure of such a risk is also important to maintaining a fully informed market. Evidence should be led at the first Court hearing of the availability of the funding or other financial support on which the special purpose vehicle will rely to complete the scheme."
I am satisfied that, although Firebird BidCo is a special purpose vehicle, it has the benefit of a binding equity commitment letter which is subject to the scheme becoming effective and a binding debt commitment letter which is subject to conditions precedent customary for facilities of this kind, as set out in section 6.4 of the scheme booklet.
Second, Mr Izzo addresses the question of a break fee payable in respect of the scheme. I proceed on the basis now contemplated by paragraph 26(h) of Harmonised Practice Note SC Eq 4 that: "[t]he Court expects a scheme proponent to lead evidence at the first Court hearing concerning any break fee as a percentage of the implied equity value of the scheme proponent and the general nature and length of any exclusivity provisions. Submissions as to these matters need not be extensive if the amount of the break fee and the nature and length of the exclusivity provisions do not raise novel issues."
Under cl 15.3 of the SIA, Estia Health must pay Firebird BidCo a "Target Break Fee" of $8,267,553 (exclusive of GST) in certain circumstances, which do not depart from standard practice. In particular, a Target Break Fee is not payable merely because the resolution submitted to the scheme meeting in respect of the scheme is not approved by the majorities required under s 411(4)(a)(ii) of the Act. The Target Break Fee represents less than 1% of the implied equity value of Estia Health based on the maximum consideration of $3.20 per share which was payable under the SIA, which represents an implied equity value of approximately $836.9m. Clause 16 of the SIA also provides for a reverse break free of $8,267,553 (inclusive of GST) where the agreement is terminated for material breach by Firebird BidCo or Firebird BidCo does not comply with its obligations to pay the scheme consideration. I accept that these matters are not reason to decline to convene the scheme meeting.
Third, Mr Izzo addresses the question of exclusivity arrangements. I referred above to paragraph 26(h) of Harmonised Practice Note SC Eq 4, which addresses such arrangements. Mr Izzo points out that cl 17 of the SIA includes "no shop", "no talk", "no due diligence", "notification" and "matching right" obligations, and the "no due diligence" and "no talk restrictions" in cl 17.3 and 17.4 of the SIA are subject to fiduciary and statutory carve outs in cl 17.5 of the SIA. The "Exclusivity Period" as defined in the SIA is capable of precise ascertainment and continues for a maximum of approximately 6 months after the date of the SIA or as otherwise agreed in writing between Estia Health and Firebird BidCo. The exclusivity provisions are sufficiently disclosed in section 2.5(d) of the scheme booklet and I accept that exclusivity provisions of this kind have previously been accepted: ELMO at [29].
Fourth, Mr Izzo addresses the question of performance rights. Section 5.7 of the scheme booklet deals with the proposed treatment of some 1,682,072 Estia Health Performance Rights (as defined), and Estia Health's board has resolved that these rights will vest and automatically be exercised shortly before the Scheme Record Date (as defined). Mr Izzo submits and I accept that it is well-established that such arrangements do not have the effect that shareholders who hold such rights are in a separate class of members for that reason only: ELMO at [25]. Mr Izzo also notes that the directors of Estia Health unanimously recommend in the scheme booklet that Estia Health shareholders vote in favour of the scheme. The scheme booklet discloses the interests and dealings in Estia Health shares and Estia Health Performance Rights of the directors of Estia Health in the letter from the Chair of Estia Health and elsewhere in sections referring to the directors' voting intention and recommendations. I accept that, once those interests are fairly disclosed, they do not require the directors to refrain from making a recommendation: Re Kidman Resources Ltd [2019] FCA 1226 at [115]; Re DWS Ltd [2020] FCA 1590 at [41]-[49]; Re Intega Group Ltd [2021] NSWSC 1434 at [22]; Re Kyckr Ltd [2022] NSWSC 1316 at [18]; Re Pendal Group Ltd (No 2) [2022] NSWSC 1648 at [25].
Fifth, Mr Izzo addresses the question of deemed warranties. Clause 8.4 of the scheme of arrangement provides for a "deemed warranty" that an Estia Health shareholder's shares are fully paid and free of encumbrances. The inclusion of clauses of this kind will not prevent the making of orders under s 411(1), provided that the clause is properly disclosed in the scheme booklet: ELMO at [32]. These matters are disclosed in sections 1.8 and 9.2(g) of the scheme booklet and also referred to in Part A of the Frequently Asked Questions at section 3.
Sixth, Mr Izzo deals with the question of proposed inbound and outbound shareholder calls. I noted the relevant case law in InvoCare at [25] and observed (at [26]) that: "[w]hile I am inclined to think that a scheme company's intended communications with securityholders should be disclosed at the first Court hearing, I would prefer to characterise that as an expectation of the Court rather than a requirement. It may be that little turns on the difference between the two, since it is not easy to see why scheme companies or their advisers would prefer to leave securityholder communications to be reviewed only at a second Court hearing and risk the prospect of failure of a scheme at that hearing if those communications have undermined the integrity of the securityholder vote, rather than making those communications available for review at the first Court hearing while there is still time to correct any difficulty with them."
Paragraph 26(k) of Harmonised Practice Note SC Eq 4 now notes that: "[t]he Court expects that the Court's approval should be sought for a supplementary explanatory statement to be sent to securityholders in a scheme. The Court also expects that the nature of the scheme proponent's intended communications with securityholders should be disclosed at the first Court hearing. Parties may also wish to continue the existing practice of drawing the Court's attention to material communications to securityholders after the first Court hearing, at least by a communication to the chambers of the judge hearing the application, to reduce the risk of difficulties arising at the second Court hearing."
Estia Health has engaged Morrow Sodali Pty Ltd, a shareholder services advisory firm, to conduct an inbound and outbound shareholder engagement campaign in relation to the scheme. I have reviewed the scripts for the proposed inbound and outbound calls, which are consistent with the information in the scheme booklet, and I have no difficulty with them. I need not formally approve them on that basis: Re InvoCare at [23]-[26].
Mr Izzo points out that Estia Health has also engaged Link Market Services Limited ("Link"), its share registry services firm, to dispatch documents relating to the scheme meeting to Estia Health shareholders if the Court makes orders convening the scheme meeting, and these matters are sufficiently addressed by the proposed orders. Link will also send a reminder email to those Estia Health shareholders who have not yet lodged a proxy in advance of the scheme meeting; the text of the proposed reminder email has been disclosed to the Court in the evidence and I have no difficulty with it; and an order approving the reminder email is not necessary: InvoCare at [23]-[26].

Orders

For these reasons, I made the orders sought by Estia Health at the conclusion of the first Court hearing.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 October 2023

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